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Labor Productivity Declines the Most Since 1981 as Labor Costs Soar 8.3%

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35 comments on Labor Productivity Declines the Most Since 1981 as Labor Costs Soar 8.3%

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The cost of labor is soaring even though output per hour worked is decreasing according to the BLS Productivity and Costs report for the third quarter of 2021.

Productivity Highlights 

  • Nonfarm business sector labor productivity decreased 5.0 percent in the third quarter of 2021 as output increased 1.7 percent and hours worked increased 7.0 percent. 
  • This is the lowest rate of quarterly productivity growth since the second quarter of 1981, when the measure decreased 5.1 percent. (All quarterly percent changes in this release are seasonally adjusted annual rates.)
  • From the third quarter of 2020 to the third quarter of 2021, nonfarm business sector labor productivity decreased 0.5 percent. 
  • The four-quarter rate is the lowest rate since the third quarter of 2011, when the measure also declined 0.5 percent.

Labor Cost Highlights 

  • Unit labor costs in the nonfarm business sector increased at an annual rate of 8.3 percent in the third quarter of 2021, reflecting a 2.9-percent increase in hourly compensation and a 5.0-percent decrease in productivity. 
  • Unit labor costs increased 4.8 percent over the last four quarters. 

Unit labor costs are the ratio of hourly compensation to labor productivity. Increases in hourly compensation tend to increase unit labor costs and increases in productivity tend to reduce them.

Labor productivity, or output per hour, is calculated by dividing an index of real output by an index of hours worked by all persons, including employees, proprietors, and unpaid family workers. The third quarter of 2021 is the fifth consecutive quarter with increases in both output and hours worked, following historic declines in those measures in the second quarter of 2020. 

The output index is now 1.8 percent above the level seen in the fourth quarter of 2019, the last quarter not affected by the COVID-19 pandemic, while the hours worked index remains 1.0 percent below its fourth quarter 2019 level.

Manufacturing Productivity

  •  Manufacturing sector labor productivity decreased 1.0 percent in the third quarter of 2021, as output increased 5.7 percent and hours worked increased 6.7 percent. 
  • In the durable manufacturing sector, productivity increased 1.4 percent, with a 9.9-percent increase in output and an 8.4-percent increase in hours worked.
  • Nondurable manufacturing sector productivity decreased 2.6 percent, as output (+1.3 percent) grew slower than hours worked (+4.0 percent). 
  • Total manufacturing sector productivity increased 2.4 percent from the same quarter a year ago. 

 Manufacturing Labor Costs

  • Unit labor costs in the total manufacturing sector increased 2.9 percent in the third quarter of 2021, reflecting a 1.9-percent increase in hourly compensation and a 1.0-percent decrease in productivity.
  •  Manufacturing unit labor costs increased 1.9 percent from the same quarter a year ago.

Manufacturing vs Service Sector Productivity

Manufacturing productivity has been hampered by numerous supply chain issues especially crippling any devices that need computer chips. 

Yet, manufacturing productivity only fell 1.0% vs 5.0% overall. 

That means service sector costs vs output is soaring out of sight.

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StukiMoi
StukiMoi
2 years ago
Leaving aside that “productivity”, like any other possible “measure” where the units of measured are simply arbitrarily pulled out of someone’s rear and/or debased to make the quarterwits in charge appear to somehow only be halfwits:
Diminishing returns is a thing. A big thing. Perhaps the biggest thing:
When output is low, low hanging fruit is picked first. Once output grows rapidly, that low hanging fruit is increasingly gone. Making any further growth less easy. Hence less efficient. Hence less “productive.” Elon Musk popping uppers to help Hail Mary wrenching on Model 3s in a tent out back, simply won’t be as productive as properly planned assembly line production. Yet when demand was there, that’s what he did.
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GodfreeRoberts
GodfreeRoberts
2 years ago
Meanwhile, Chinese productivity rose 8% YoY, as it has done for at least 40 years now.
That’s partly because Beijing is laser focused on supporting productivity gains–and cutting taxes.
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Tony Bennett
Tony Bennett
2 years ago
Reply to  GodfreeRoberts
Hate to be the bearer of bad news … but China beginning to circle the drain …
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StukiMoi
StukiMoi
2 years ago
Reply to  Tony Bennett
Even so, there is incompetence (China); but then there is Gross, all encompassing, all overshadowing incompetence…..
Compared to the latter, the former still manages to look quite impressive.
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Zardoz
Zardoz
2 years ago
Reply to  GodfreeRoberts
Says the Chinese government….
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Webej
Webej
2 years ago
Output is measured in dollars.
When someone in in America or Vietnam assembles a widget in one hour, the American is paid $20 but the Vietnamese is paid $1.
However, the widget in costs $20 in the US, but only $1 in Vietnam, so their labor productivity is equal.
However, if the widget is export from the US to Vietnam at price par, the American is only 5% as productive.
When the Vietnamese widget is exported to the US for $1, the Vietnamese is 20× more productive.
There is a bit of a circle jerk involved (also known as a tautology). The value of the output scales with all kinds of other economic and market factors which don’t give any reading on the physical output, only on its value, which is itself a variable.
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StukiMoi
StukiMoi
2 years ago
Reply to  Webej
Problem is the American is only paid $2 anymore. The remaining $18 going to some monkey scratching his head with a banana peel at some “PE” “firm” while Powell is cheering him on.
While those $18 could otherwise have allowed the American to purchase a machine allowing him to outproduce the poor Vietnamese guy 30/1…. But, instead, the money is spent keeping idiots who produce nothing, flush, vain and vapid.
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Eddie_T
Eddie_T
2 years ago
We’re on track to gross close to 2019 levels for the year. That’s a win in my book.
We’re fully staffed and we have managed to get back up to speed, almost…..I think some of the changes we made to prevent COVID community spread are going to be permanent changes, unfortunately. The days of crowded waiting rooms in dental offices are over, unless something changes that I don’t see coming.
We still have a serious debt overhang to absorb over several years, paying back a 150K EIDL loan, which I really don’t expect to see forgiven…although I suppose it’s possible. We have the most productive staff I’ve ever had, and I’m grateful for that. Labor costs are up, there’s no doubt about that. But you can afford to reward highly productive employees.
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Doug78
Doug78
2 years ago
Reply to  Eddie_T
I always have hated the crowded waiting rooms and never could figure out why they were so so I welcome the new waiting rooms and no longer have to worry about fighting over magazines on the table.
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Eddie_T
Eddie_T
2 years ago
Reply to  Doug78
I remember when only gold dealers had locked front doors during business hours.
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Doug78
Doug78
2 years ago
Reply to  Eddie_T
Do you put the magazines outside of the door on the floor?
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Eddie_T
Eddie_T
2 years ago
Reply to  Doug78
We were ordered to remove all magazines when the dental board finally got around to issuing guidelines, 2 months after COVID hit, and long after we had taken our own precautions.  Some months ago now they decided it was okay to bring magazines back. We have them in the treatment rooms but not in the waiting room.
The waiting room is now really just a staging area. No more than one person at a time is allowed in there, and not for that long. The door to the outside is locked, and access is tightly controlled.
We do have free wifi.
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TexasTim65
TexasTim65
2 years ago
Reply to  Doug78
As my 13 year old daughter would say: “What’s a Magazine?” 🙂
Today everyone stares at their phone/tablet for entertainment in waiting rooms. Having people wait in their cars or dentist/doctors offices doing a better job managing ‘just in time’ service so you arrive exactly at the right time means less need for waiting rooms and magazines.
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Eddie_T
Eddie_T
2 years ago
Reply to  TexasTim65
Sometimes easier said than done….but .most of the time it works pretty well. But there are often two or more patients arriving at the same time, and so some good communication helps.
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Tony Bennett
Tony Bennett
2 years ago
“This is the lowest rate of quarterly productivity growth since the second quarter of
1981, when the measure decreased 5.1 percent.”
…
1981, eh?  Hhhmm, … what happened in 1981? … oh yeah, start of recession … July 1981 start …
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Eddie_T
Eddie_T
2 years ago
Reply to  Tony Bennett
The absolute nosebleed top of Volcker’s interest rate medicine for inflation. 20.5% prime rate. I don’t think he was quite as worried about overshooting his target as Powell is.
I got married that month. Forty years ago now. Time flies.
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Carl_R
Carl_R
2 years ago
Reply to  Eddie_T
That was also the month I bought a 5 year CD at a local savings and loan that paid 15.75% a year. I was worried about what I’d get when they all collapsed, but I got paid.
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Business Man
Business Man
2 years ago
I am one of those with a business in the service sector.
There is a huge reckoning coming to the data.  It has been occurring since Q1 this year, and I’ve been waiting for when all ivory tower economists see it and realize what’s happening.  Right now they seem to believe that this a minor Covid blip.
I think something more fundamental has happened.  People got used to being away from work for a lengthy period of time, and they do not want to go back to the grind.  They are pursuing “work from home” jobs and do not want to get back into the “serve the public” mindset.
Services are getting expensive, but they are going to get REAL expensive in the coming year.  Everyone will be paying out the nose for everything from replacing a muffler, to a haircut to getting your lawncare.  I’ve seen more business owners this year doing hard labor than I ever have before.  There will be a price for that.
It will be a bloodbath for Democrats at the polls next year if this keeps up.
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conservativeprof
conservativeprof
2 years ago
Reply to  Business Man
We have not seen anything on labor costs. The entire economy is brewing with labor unrest. Despite repeated denials, the recent airline chaos (SW, American, and SkyWest) involves job actions, not weather, worker shortages, and other non reasons. Every labor cartel is ready for a strike on the next contract negotiations. Democrats want to encourage many other workers to join labor cartels. Many large companies are acting in advance to increase compensation. Housing and energy costs are driving demands for compensation increases besides a tight labor market. The tight labor market is partially driven by government intervention. If Democrat spending priorities become law, more workers will refuse to work entry level jobs. There is a strong danger of a wage-price spiral. Low labor productivity was a major driver in the 1970s stagflation along with high energy costs. Democrats seem blind to the coming storm.
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Business Man
Business Man
2 years ago
Reply to  conservativeprof
100% agreed.  Nice post.
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thimk
thimk
2 years ago
well wondering how  Biden’s 80 million worker vaccine mandate will effect unit labor costs? Sheesh,, just when the economy is gaining momentum, awakening from a self induced covid  lock-down. Kudos to those in the service sector for increased wages. Now if we can get housing costs down this segment may have a chance. 
 
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Zardoz
Zardoz
2 years ago
Reply to  thimk
The small fraction that are too dumb to get vaccinated will go on the teat. Everyone else will carry on as before.
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Carl_R
Carl_R
2 years ago
Sooner or later the standard of living has to match productivity. This graph is commonly presented to show that wages are not tracking with productivity gains:
Yet, if you include total compensation (which includes retirement benefits, health benefits, etc), the chart looks as you would expect it to:
I believe that massive increase in health costs since 1970 is the reason for the difference,.
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Eddie_T
Eddie_T
2 years ago
Reply to  Carl_R
Great point.
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Doug78
Doug78
2 years ago
Reply to  Carl_R
Massive increase in health costs without a corresponding increase in health and life expectancy. It’s a complicated subject. 
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Carl_R
Carl_R
2 years ago
Reply to  Doug78
Yes, it is. For example, the Amish, which don’t use the medical care system have a life expectancy higher that the general population. On the other hand, they eat a different diet, and live a different lifestyle, so it’s not an apples to apples comparison. The best you can conclude is that any gains from our health system are offset by the losses to processed food and a dormant lifestyle.
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Tony Bennett
Tony Bennett
2 years ago
Normally I would worry about earnings and such … but equities long ago left their mooring of historic fundamentals / valuations.
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Business Man
Business Man
2 years ago
Reply to  Tony Bennett
100%.  Equities continue to build this huge bubble of detachment from fundamentals, and one has to think that one day it will all come crashing back to reality.
It always has, hasn’t it?
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Tony Bennett
Tony Bennett
2 years ago
Reply to  Business Man
It won’t be different THIS time as many assume.
It will be ugly.
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TexasTim65
TexasTim65
2 years ago
Reply to  Business Man
Equities are simply held up by all the money sloshing around in the system that the Fed continues to print. It has to go somewhere since it loses 5+% a year to inflation if you leave it in the bank and stocks, real estate, cryptos and collectibles (sports cards/NFTs etc) are where it’s going because those are for the most part ‘non-printable’.
So even though there is a huge disconnect between stocks and fundamentals I don’t believe the market can crash in a dramatic fashion as long as more and more cash gets printed.
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Business Man
Business Man
2 years ago
Reply to  TexasTim65
I think that’s an excellent thought.  But at some point these companies have to prove that they can generate a return on the shareholder’s dollar that keeps up with at least inflation and other investment options.  If they don’t, shareholders will slowly (or quickly) notice that they have other options, and that they want to be the first out, not the last.
When that exit turns into a stampede is when the whole thing goes.  Everything will go somewhere “safe” and then everything will flood back for the value buys.
It’s craziness, but it’s almost like the human body.  When you have an infection, you get a fever that almost kills you.  It’s the body’s way of fixing the problem, even if it is almost as dangerous as the infection itself.  Then the body returns to normal after the pathogen dies off.
In the long term, the body is better off, just as our economy and the stock market.
I am waiting for that 104 degree fever to come.  The longer it takes, the worse it is going to be.
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Carl_R
Carl_R
2 years ago
Reply to  Business Man
Great post. The Russian economist Kondratief observed that very cycle in capitalism, and that, despite it’s many faults, the capitalist system kept repairing itself through cyclical depressions, and post-depression emerged stronger and revitalized, ready for another boom. To a certain extent, modern economics has found ways to prevent the natural cycle. The result is that the excesses never get purged, and the economy is never revitalized. Instead of cyclical busts and booms, we’ve move to a prolonged period of excesses and stagnation.
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tbergerson
tbergerson
2 years ago
Reply to  Business Man
Earnings have in fact been stellar for publicly traded companies.  But multiples have gone up even faster.  Stock buybacks have been one major source of the equities strength, reducing float.  Another thing reducing float is Private Equity and Sarbanes-Oxley.  The Wilshire 5000 used to have more than 5000 stocks.  Today there are between 3500 and 4000.  Pension money has to go somewhere.  Especially with bonds providing low yields in this formerly low-inflation environment.  TINA.
Interest rates are what will kill stocks.  And rates depend on what inflation does.  Looks bad, but will it turn out that way?  Well 10 Year yields tagged 1.60 yesterday with the Fed providing its QE exit roadmap.  But it is 1.52% today.   Read Lacy Hunt.  Deflation are very likely still the future.
The Great Financial Crisis broke the world.  The world has pulled a lot of levers to paper that over.  China (one of the biggest causes of what ails the world) especially.  Will the can kicking allow things to heal?  Not likely.  But it took the Soviet Union a long time to collapse.  While the world cannot hide everything forever, with Central Banks who now know no limits (along with no limits on anything else so why not), the final denouement can be long in coming.  Things go in waves.  Sometimes up, sometimes down.  We are now in a waning period.  The only question is how bad the bottom is when it comes.  End of civilization bad?  Dark ages bad?  That seems a stretch at this point.  Probably take another couple hundred years before todays “mother of the world” fails completely
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Business Man
Business Man
2 years ago
Reply to  tbergerson
Your post made me think of the history of usury.  I know, weird, but it just popped in my mind that the Christian church has for many centuries banned usury as a sin.  Ironically, around the 16th century, the Church started relaxing on it and “lifted” the ban.  There is controversy about that, but that’s the mainstream opinion.  From this, flowed some important ideas, and the green shoots of modern capitalism emerged.
I thought about it because usury is essentially just charging interest, as you know.  It is the entire basis of our capitalist system.  It is also the basis of how Central Banks manipulate our economies, mostly for bad (it seems).
Modern anti-Semitism is based on Christians relegating Jews to do their banking many centuries ago, because it was against Christian’s “ethics” and rules.  Well, the Jews made some money doing it, and they were scorned for it.  These traditions–and unfortunate byproducts–have stuck around even through today.
I just wonder if–thousands of years ago–they learned some things about interest and leverage that caused this kind of banishment.  It’s even quoted in the Bible a bit, as not banning interest, but frowning on it.  “Lend to your neighbor and expect nothing back and you will be rewarded…” sort of thing.
I think that many lessons of humanity repeat over time as we lose history.  I think humans are forced to relearn lessons over and over again, to much tragedy.  I wonder if we are about to lose this wonderful system we’ve had here for a couple hundred years because of the greed of one generation (massive deficits for governments all over the world, but mostly ours).  The idea that you can have something now and pay for it much later was very controversial until probably the last century.
I know, I’m off on a tangent, but your post really got me thinking, so thanks for that.
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Eddie_T
Eddie_T
2 years ago
Reply to  Tony Bennett
There is one sector that’s fairly valued. 
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